Mortgage rates have been relatively low for years. Seeing them inch up can cause home shoppers to panic and possibly put their home purchase on hold.
The good news is that there are options when mortgage rates are rising.
First, it’s worthwhile knowing that small increases in mortgage interest rates shouldn’t affect buyers too much — a one-half percent rise in mortgage rates is only about $28 more per month on a $100,000 loan.
A 30-year fixed-rate mortgage is the most common type of home loan. There are other types of home loans and other options that can make buying a home easier, though they often come with the caveat that a low interest rate now may mean a higher one later. Here are some options:
Get an ARM: An adjustable rate mortgage, or ARM, will have a lower interest rate than a fixed loan, but only for a certain number of years before it changes.
The interest rate will be fixed for three, five, seven or 10 years, then may go up if interest rates are rising. The longer the fixed-rate period, the less savings you’ll see in the interest rate.Pay More Points: Paying discount points can lower your interest rate. Each point costs 1 percent of the loan rate to lower your rate by one-eighth to one-quarter percent. Paying two points, or $2,000 on a $100,000 loan, to lower a 4.25 percent loan to 4 percent equals $15 per month in savings.
You’ll have to calculate how many months it would take to make up that savings. In the above case, it would take 133 months of saving $15 per month to make up the $2,000 paid for the lower interest rate. That’s about 11 years of living in a home.
Make a Bigger Down Payment: Coming up with a bigger down payment is another way to afford higher interest rates on a loan. The more money you put down, the less money you’ll need to borrow—and, sometimes, it can help you get a lower interest rate.
Do the Floatdown Option: Pay a fee of one-quarter to one-half of a point to get a floatdown option to protect you if mortgage rates drop by the time you close on the loan. If rates fall during the typical 45 days it takes to close a home loan, you’ll get the lower rate.
Those are just some of the options borrowers have when interest rates are rising. Ask your mortgage provider for more.
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